(EBIT-EPS analysis) A group of retired college professors has decided to form a small manufacturing corporation that will produce a full line of traditional office furniture. The investors have proposed two financing plans. Plan A is an all-common-equity alternative. Under this agreement, 1.6 million common shares will be sold to net the firm $10 per share. Plan B involves the use of financial leverage. A debt issue with a 20-year maturity period will be privately placed. The debt issue will carry an interest rate of 11 percent, and the principal borrowed will amount to $3.2 million. The marginal corporate tax rate is 24 percent. a. Find the EBIT indifference, level associated with the two financing proposals. b. Prepare a pro forma income statement that proves EPS will be the same regardless of the plan chosen at the EBIT level found in part a. c. Prepare an EBIT-EPS analysis chart for this situation. d. If a detailed financial analysis projects that long-term EBIT will always be close to $2.26 million annually, which plan will provide for the higher EPS? e. If you were to present the results of your analysis found in part a through d, how would you summarize your findings to your employer? a. What is the EBIT indifference level associated with the two financing proposals? (Round to the nearest dollar.) b. Fill in the blanks in the following income statement for plan A. Round the EPS to two decimal places and all other items to the nearest dollar. PLAN A (Type a whole number.) (Round to the nearest dollar.) EBIT Less: Interest expenses Earnings before taxes (EBT) Less: Taxes at 24% Net income Divide: Number of common shares Earnings per share (EPS) $ (Round to the nearest dollar.) (Round to the nearest dollar.) (Round to the nearest dollar.) (Round to the nearest cent.) (Type a whole number.) Fill in the blanks in the following income statement for plan B. Round the EPS to two decimal places and all other items to the nearest dollar. PLAN B
(EBIT-EPS analysis) A group of retired college professors has decided to form a small manufacturing corporation that will produce a full line of traditional office furniture. The investors have proposed two financing plans. Plan A is an all-common-equity alternative. Under this agreement, 1.6 million common shares will be sold to net the firm $10 per share. Plan B involves the use of financial leverage. A debt issue with a 20-year maturity period will be privately placed. The debt issue will carry an interest rate of 11 percent, and the principal borrowed will amount to $3.2 million. The marginal corporate tax rate is 24 percent. a. Find the EBIT indifference, level associated with the two financing proposals. b. Prepare a pro forma income statement that proves EPS will be the same regardless of the plan chosen at the EBIT level found in part a. c. Prepare an EBIT-EPS analysis chart for this situation. d. If a detailed financial analysis projects that long-term EBIT will always be close to $2.26 million annually, which plan will provide for the higher EPS? e. If you were to present the results of your analysis found in part a through d, how would you summarize your findings to your employer? a. What is the EBIT indifference level associated with the two financing proposals? (Round to the nearest dollar.) b. Fill in the blanks in the following income statement for plan A. Round the EPS to two decimal places and all other items to the nearest dollar. PLAN A (Type a whole number.) (Round to the nearest dollar.) EBIT Less: Interest expenses Earnings before taxes (EBT) Less: Taxes at 24% Net income Divide: Number of common shares Earnings per share (EPS) $ (Round to the nearest dollar.) (Round to the nearest dollar.) (Round to the nearest dollar.) (Round to the nearest cent.) (Type a whole number.) Fill in the blanks in the following income statement for plan B. Round the EPS to two decimal places and all other items to the nearest dollar. PLAN B
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:(EBIT-EPS analysis) A group of retired college professors has decided to form a small manufacturing corporation that will produce a full line of traditional office furniture. The investors have proposed
two financing plans. Plan A is an all-common-equity alternative. Under this agreement, 1.6 million common shares will be sold to net the firm $10 per share. Plan B involves the use of financial
leverage. A debt issue with a 20-year maturity period will be privately placed. The debt issue will carry an interest rate of 11 percent, and the principal borrowed will amount to $3.2 million. The
marginal corporate tax rate is 24 percent.
a. Find the EBIT indifference, level associated with the two financing proposals.
b. Prepare a pro forma income statement that proves EPS will be the same regardless of the plan chosen at the EBIT level found in part a.
c. Prepare an EBIT-EPS analysis chart for this situation.
d. If a detailed financial analysis projects that long-term EBIT will always be close to $2.26 million annually, which plan will provide for the higher EPS?
e. If you were to present the results of your analysis found in part a through d, how would you summarize your findings to your employer?
a. What is the EBIT indifference level associated with the two financing proposals?
(Round to the nearest dollar.)
b. Fill in the blanks in the following income statement for plan A. Round the EPS to two decimal places and all other items to the nearest dollar.
PLAN A
(Type a whole number.)
(Round to the nearest dollar.)
EBIT
Less: Interest expenses
Earnings before taxes (EBT)
Less: Taxes at 24%
Net income
Divide: Number of common shares
Earnings per share (EPS)
$
(Round to the nearest dollar.)
(Round to the nearest dollar.)
(Round to the nearest dollar.)
(Round to the nearest cent.)
(Type a whole number.)
Fill in the blanks in the following income statement for plan B. Round the EPS to two decimal places and all other items to the nearest dollar.
PLAN B
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